Krugman’s blog, 12/18/14

December 19, 2014

There was one post yesterday, “Notes on Russian Debt:”

I have to admit that the Russian crisis has me feeling young again — it’s back to all the old issues from the Asian debt crisis of 1997-1998, when bad things mainly happened to other countries and the discussion here was relatively technocratic; also, I was a lot younger (did I mention that?). And although it’s very serious stuff — I keep pulling myself up short when I want to use standard metaphors like an economic meltdown, because I suddenly remember that Putin has nukes — I am getting some satisfaction in trying to puzzle out the underlying issues.

Which brings me to the interesting question of Russian debt.

Obviously plunging oil prices are bad for petroeconomies. But what is making the Russian experience so dire is the linkage oil->ruble->balance sheets, because of all the dollar- and euro-denominated debt. This, however, raises several questions.

First, how did they get that debt? Here’s the Russian current account balance over the past couple of decades:

It has been in consistent large surplus, with a cumulative surplus of more than $900 billion. Russia should not be a debtor country. It has managed this nonetheless, presumably because corporations and banks have borrowed abroad, and somehow that money has ended up invested in luxury London real estate and other things. It would be nice to have a good picture of how the flow of funds worked.

That said, at first glance the debt level doesn’t look too high. Here’s the ratio to GDP:

The central bank helpfully points out that this is in a range the IMF considers low-risk, and there wasn’t any visible upward trend.

But watch out for that denominator. Debt to GDP was stable, but GDP was rising fast in dollar terms, not because of real growth, but because of real appreciation. Compare the actual rise in the ruble price of a dollar, which was modest until the past few weeks, with the rise that would have compensated for relative Russian inflation:

So I would argue that Russia was in fact going rapidly deeper into debt, but that this was masked by the growing overvaluation of the ruble thanks to high oil prices. Now comes the fall, and suddenly debt looks like a much bigger issue.

And of course the ratio of debt to exports has also shot up.

I’d add a further suspicion: that the reliance on oil exports worsens the problem because ruble depreciation can’t bring about a big export response, at least in the short to medium run — not enough of a non oil base, so even a large percentage increase doesn’t do very much.

Anyway, interesting stuff. At this point the approved move is either (a) go to the IMF or (b) invade the Malvinas. Somehow, (a) doesn’t seem likely — and Putin did (b) in advance.

Brooks and Krugman

December 19, 2014

In “The Union Future” Bobo has the gall to ask a question:  Do the people who have marched over the Brown and Garner cases have the stamina to force change?  In the comments “Claus Gehner” from Seattle and Munich had this to say:  “This is really quite an amazing column.  The title and first paragraph lead one to believe that Mr. Brooks, of all people, is intent on starting a serious conversation on how to address the horrific income and wealth inequality in the US, and the possible role of Labor Unions in that process.  But then, very quickly, Mr. Brooks reverts to character and concentrates on lambasting public sector unions, one of the favorite targets of some of the more odious GOP Governors. The little snipe, almost as an aside, at the Teachers Unions is just a warm up. He then has the audacity to blame the Police Unions for the racial tensions, which are really the remnants pervasive racism in the US in general.”  So it’s typical Bobo crap.  Prof. Krugman, in “Putin’s Bubble Bursts,” says the global plunge in oil prices and the falling ruble have wreaked havoc on the Russian economy. It’s been quite a comedown for the strongman.  Here’s Bobo:

Over the past decades, the case for enhancing union power has grown both stronger and weaker. On the one hand, as wages have stagnated while profits have soared, it does seem that there is something out of whack in the balance of power between labor and capital. Workers need some new way to collectively bargain for more money.

On the other hand, unions, and especially public-sector unions, have done a lot over the past decades to rigidify workplaces, especially government. Teachers’ unions have become the single biggest impediment to school reform. Police unions have become an impediment to police reform.

If you look at all the proposals that have been discussed since the cases of Michael Brown in Ferguson, Mo., and Eric Garner in New York, you find that somewhere or other around the country, police unions have opposed all of them:

GETTING RID OF BAD COPS A small percentage of cops commit most of the abuses. A study by WNYC News in New York found that, since 2009, 40 percent of the “resisting arrest” charges were filed by just 5 percent of New York Police Department officers. In other words, most officers rarely get in a confrontation that leads to that charge, but a few officers often get in violent confrontations.

But it’s very hard to remove the bad apples from the force. Trying to protect their members, unions have weakened accountability. The investigation process is softer on police than it would be on anyone else. In parts of the country, contract rules stipulate that officers get a 48-hour cooling-off period before having to respond to questions. They have access to the names and testimony of their accusers. They can be questioned only by one person at a time. They can’t be threatened with disciplinary action during questioning.

More seriously, cops who are punished can be reinstated through a secretive appeals process that favors job retention over public safety. In The Atlantic, Conor Friedersdorf has a riveting piece with egregious stories of cops who have returned to the force after clear incompetence. Hector Jimenez was an Oakland, Calif., cop who shot and killed an unarmed 20-year-old man in 2007. Seven months later, he killed another unarmed man, shooting him in the back three times while he ran away. The city paid damages. Jimenez was fired. But he appealed through his union and was reinstated with back pay.

CAMERAS There’s long been talk about equipping cops with wearable cameras. In Miami, Boston, and Wichita, Kan., city officials bandied about such plans, but the local unions moved to thwart them, arguing, in one case, that wearing cameras “will distract officers from their duties, and hamper their ability to act and react in dangerous situations.”

DEMILITARIZATION After riots in Ferguson, there was basically a national consensus that police don’t need mine-resistant, ambush-protected monster vehicles and military-style grenade launchers. But there’s support for the program in Washington among the defense industry and the unions. A union executive told Bloomberg News earlier this month that representatives from the Fraternal Order of Police reached out to “maybe 80 percent of senators and half the House” to defend the program. A representative of the International Union of Police Associations wrote in August after the shooting death of Brown, “I believe that law enforcement officers should have available to them any and all tools necessary to do their job and protect their community.”

STOP-AND-FRISK In New York, a court order mandated that there be federal oversight of the New York Police Department to monitor stop-and-frisk practices, a procedure that disproportionately affects minority men. The Patrolmen’s Benevolent Association moved to stall the ruling and questioned its impact. “We continue to have serious concerns about how these remedies will impact our members and the ability to do their jobs,” the president of the association said.

COMMUNITY RELATIONS In Philadelphia, a civilian oversight commission suggested that police officers apologize to citizens who complain of being mistreated. The local chief of the Fraternal Order of Police responded with a hysterical letter in March 2012 claiming that the commission was trying “to further weaken and demoralize the Philadelphia Police Department in a time of crisis with a significantly growing crime problem in this city. … Your group poses a direct threat to public safety in this city. A threat which should no longer be tolerated by our citizens or their government.”

We get mad at racism, but most government outrages have structural roots. The left doesn’t want to go after police unions because they’re unions. The right doesn’t want to because they represent law and order. Politicians of all stripes shy away because they are powerful.

Now we have a test case to see if the people who march about the Garner case have the stamina to force change. Legitimate union advocacy has become extreme because it has gone unchecked. Most cops do hard jobs well, but right now there’s a crisis of accountability.

Now here’s Prof. Krugman:

If you’re the type who finds macho posturing impressive, Vladimir Putin is your kind of guy. Sure enough, many American conservatives seem to have an embarrassing crush on the swaggering strongman. “That is what you call a leader,” enthused Rudy Giuliani, the former New York mayor, after Mr. Putin invaded Ukraine without debate or deliberation.

But Mr. Putin never had the resources to back his swagger. Russia has an economy roughly the same size as Brazil’s. And, as we’re now seeing, it’s highly vulnerable to financial crisis — a vulnerability that has a lot to do with the nature of the Putin regime.

For those who haven’t been keeping track: The ruble has been sliding gradually since August, when Mr. Putin openly committed Russian troops to the conflict in Ukraine. A few weeks ago, however, the slide turned into a plunge. Extreme measures, including a huge rise in interest rates and pressure on private companies to stop holding dollars, have done no more than stabilize the ruble far below its previous level. And all indications are that the Russian economy is heading for a nasty recession.

The proximate cause of Russia’s difficulties is, of course, the global plunge in oil prices, which, in turn, reflects factors — growing production from shale, weakening demand from China and other economies — that have nothing to do with Mr. Putin. And this was bound to inflict serious damage on an economy that, as I said, doesn’t have much besides oil that the rest of the world wants; the sanctions imposed on Russia over the Ukraine conflict have added to the damage.

But Russia’s difficulties are disproportionate to the size of the shock: While oil has indeed plunged, the ruble has plunged even more, and the damage to the Russian economy reaches far beyond the oil sector. Why?

Actually, it’s not a puzzle — and this is, in fact, a movie currency-crisis aficionados like yours truly have seen many times before: Argentina 2002, Indonesia 1998, Mexico 1995, Chile 1982, the list goes on. The kind of crisis Russia now faces is what you get when bad things happen to an economy made vulnerable by large-scale borrowing from abroad — specifically, large-scale borrowing by the private sector, with the debts denominated in foreign currency, not the currency of the debtor country.

In that situation, an adverse shock like a fall in exports can start a vicious downward spiral. When the nation’s currency falls, the balance sheets of local businesses — which have assets in rubles (or pesos or rupiah) but debts in dollars or euros — implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more. And Russia fits the standard playbook.

Except for one thing. Usually, the way a country ends up with a lot of foreign debt is by running trade deficits, using borrowed funds to pay for imports. But Russia hasn’t run trade deficits. On the contrary, it has consistently run large trade surpluses, thanks to high oil prices. So why did it borrow so much money, and where did the money go?

Well, you can answer the second question by walking around Mayfair in London, or (to a lesser extent) Manhattan’s Upper East Side, especially in the evening, and observing the long rows of luxury residences with no lights on — residences owned, as the line goes, by Chinese princelings, Middle Eastern sheikhs, and Russian oligarchs. Basically, Russia’s elite has been accumulating assets outside the country — luxury real estate is only the most visible example — and the flip side of that accumulation has been rising debt at home.

Where does the elite get that kind of money? The answer, of course, is that Putin’s Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits.

How does it end? The standard response of a country in Russia’s situation is an International Monetary Fund program that includes emergency loans and forbearance from creditors in return for reform. Obviously that’s not going to happen here, and Russia will try to muddle through on its own, among other things with rules to prevent capital from fleeing the country — a classic case of locking the barn door after the oligarch is gone.

It’s quite a comedown for Mr. Putin. And his swaggering strongman act helped set the stage for the disaster. A more open, accountable regime — one that wouldn’t have impressed Mr. Giuliani so much — would have been less corrupt, would probably have run up less debt, and would have been better placed to ride out falling oil prices. Macho posturing, it turns out, makes for bad economies.

Krugman’s blog, 12/17/14

December 18, 2014

There were two posts yesterday.  The first was “Lowflation and the Fed:”

At the aforementioned economics dinner, we went around the table to ask who believed the Fed would actually raise rates in 2015. Officials at the Fed have been signaling that they will; but most of the people around the table didn’t believe them. This morning’s consumer price report explains why.

Basically, while growth and job creation have finally been pretty good lately, there is so far no sign whatever that the economy is overheating. Core inflation remains below the Fed’s target (the Fed focuses on a different measure that usually runs lower than the CPI, so this report is actually fairly far below target.)

Add to this troubles abroad — the direct spillover from Russia or even Europe is fairly small, but the rising dollar means that good news on manufacturing may not last — and there is a real risk that any rate hike will turn out to have been a mistake. And it’s a mistake that would be very costly, because it could all too easily set the stage for a Japan/Europe style long-term low-inflation trap (yes, at this point I think we can put the euro area in the same category).

Of course, this is all about what the Fed should do, not what it will. But I guess I believe that top officials at the Fed have a view of the world not too different from mine, and will come around to the same conclusions.

The second post yesterday was “Jeb’s Bubble:”

So not-George Bush is running. Why, exactly?

I’m not talking about his motivations; I’m asking why, exactly, he is considered presidential material.

Back in the day, there was an answer; glowing profiles like this one declared that he had been a fabulous governor, as demonstrated by his economic success:

In a state with a surging population, Bush has presided over a booming economy with the highest rate of job creation in the country and an unemployment rate of 3.0 percent (the national average is 4.6 percent).

Actually, this would have been silly even if Florida had a well-founded boom — governors don’t matter that much. But in any case, we now know something about the other “Bush boom” — as you can see from the attached chart, it was all about a monstrous housing bubble. Bush the other didn’t cause that bubble — but all his alleged success involved taking a ride on it.

So he wasn’t an exceptional governor, or actually an exceptional anything — except maybe exceptionally good at cashing in after leaving office. Why, exactly, is he running?

Because thus far he seems the (possibly) least insane among the riders in the 2016 Clown Car…

Blow and Kristof

December 18, 2014

Ms. Collins is off today, so we have Mr. Blow and Mr. Kristof.  In “The Obamas, Race and Slights” Mr. Blow says we can talk about data on white-black bias until we are blue in the face. At some point, it simply comes down to what people believe and how they feel.  In “Welcome Back, Cuba!” Mr. Kristof says sending in gunmen to liberate the Bay of Pigs failed, but perhaps we’ll do better with diplomats, tourists and investors.  Here’s Mr. Blow:

The president and the first lady added their voices this week to the raging conversation on race following the protests that erupted in the wake of grand juries not indicting police officers who killed two unarmed black men — Michael Brown and Eric Garner.

In an interview with People magazine, Mrs. Obama recalled a trip to Target during which “the only person who came up to me in the store was a woman who asked me to help her take something off a shelf. Because she didn’t see me as the first lady, she saw me as someone who could help her. Those kinds of things happen in life. So it isn’t anything new.”

Could the Target shopper who asked Mrs. Obama for help simply not have recognized her and needed, presumably, a taller person’s assistance? Sure, in theory. Or could the encounter have been disdainful and presumptuous, a manifestation of some inherent bias? Sure, that too could have been the case.

Could there have been some combination of those forces at play? Also possible.

The truth is, we don’t know. The lady asking for help might not even know. We are not always aware of our biases, let alone are we always able to articulate them. And people can sometimes be hypersensitive to bias when they are submerged in it.

All we know is that Mrs. Obama questions the encounter and has misgivings about it. For her, it’s a feeling. Others might hear this story and feel that Mrs. Obama possibly overreacted or misconstrued the meaning of the request.

But that is, in part, what racial discussions come down to: feelings. These feelings are, of course, informed by facts, experiences, conditioning and culture, but the feelings are what linger, questions of motive and malice hanging in the air like the stench of rotting meat, knotting the stomach and chilling the skin.

As Maya Angelou once put it: “I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

There are facts, to be sure, reams and reams of social science that confirm the persistence of racial bias in all areas of society. The cover of the January/February 2015 issue of Mother Jones magazine stamps in white letters on a black cover: “Are You Racist? Science has the Answer.” Barely visible, printed in large glossy black letters on the matte black paper is an enormous, all-caps “YES.”

The cover story includes data from the Race Implicit Association Test on the Project Implicit Demonstration website. (Project Implicit was founded by scientists at the University of Washington, Harvard University and the University of Virginia.) The data showed that whites and East Asians had the strongest pro-white/anti-black biases. These biases were also strongest among those 65 and older, although those 18 to 24 ranked second among the age groups (this strand of bias among college aged people deserves its own study). And politically, these biases were greatest among the moderately conservative and weakest among the strongly liberal. But we can talk about data on white-black bias until we are blue in the face. At some point, it simply comes down to what people believe, and yes, how they feel.

It is into this morass of feeling that we must step when discussing race. That is why interpersonal race discussions can feel so strange, messy and uncomfortable — we must confront the amorphousness and the mythologies. We must value the questions even when we cannot answer them. We must allow ourselves to empathize with other people’s feelings.

And we have to allow people — including the First Couple — to talk about their experiences, and then try to put those experiences into a broader context.

Mrs. Obama also said her husband “had his share of troubles catching cabs” when living in Chicago, and the president, for his part, said: “There’s no black male my age, who’s a professional, who hasn’t come out of a restaurant and is waiting for their car and somebody didn’t hand them their car keys.” He indicated this had happened to him.

Mrs. Obama added another incident: “He was wearing a tuxedo at a black-tie dinner, and somebody asked him to get coffee.”

But the president wisely differentiated these slights of privilege — these upper crust indignities that might sound foreign and frivolous to people who don’t regularly dine at restaurants with valet service or attend black-tie dinners — from slights that are more common and consequential:

“It’s one thing for me to be mistaken for a waiter at a gala. It’s another thing for my son to be mistaken for a robber and to be handcuffed, or worse, if he happens to be walking down the street and is dressed the way teenagers dress.”

This gets at another subtlety of race discussions: graduations of severity. There is a difference between the rarefied racial slight and the raw racial assault, but the idea, the intellectual, rational and moral deficits from which they spring, are the same. And the feeling is the same, whether you are donning a black tie or a black hoodie.

And now that we are having these conversations, some people are getting worried. A Wall Street Journal/NBC News poll released this week found that “just 40 percent of Americans believe race relations in the U.S. are good — the lowest share registered by the poll since 1995.”

Some might see that as depressing, but I look at it optimistically. I see the result of vociferous truth-telling and justice-calling, in the face of which fairy tale obliviousness is reduced to ashes. We are being confronted and afflicted by the realities that though racial progress has been made on many measures, that progress isn’t permanent or perfect. Race remains a frame for inequality in this country.

And we can no longer dismiss racial discussions as victimhood affinity. Decrying systemic victimization is not synonymous with embracing the identity of the eternally victimized. On the contrary, identifying, condemning and relentlessly fighting oppression is part of the path to liberation.

How does all this make you feel? A little uncomfortable? Good!

And now here’s Mr. Kristof:

Is there any element of American foreign policy that has failed more abjectly than our embargo of Cuba?

When I hear hawks denouncing President Obama for resolving to establish diplomatic relations with Cuba and ease the embargo, I don’t understand the logic. Is their argument that our policy didn’t work for the first half-century but maybe will work after 100 years?

We probably helped keep the Castro regime in power by giving it a scapegoat for its economic and political failures. Look around the world, and the hard-line antique regimes that have survived — Cuba and North Korea — are those that have been isolated and sanctioned. Why do we think that isolating a regime is punishing it, rather than protecting it?

Few initiatives failed more catastrophically than the American-backed Bay of Pigs invasion of Cuba in 1961. Yet while an armed invasion failed, I bet that we would have done better if we had permitted invasions of tourists, traders and investors.

American tourists in Havana are already asking plaintively why Wi-Fi is so scarce — or why the toilet paper is so rough. We need hordes of them, giggling at ancient cars held together with duct tape, or comparing salaries with Cubans.

Sometimes the power of weaponry fades next to the power of mockery.

When I was a law student in the early 1980s, I financed a visit to the Soviet Union by smuggling in bluejeans and Walkmans and selling them on the black market. My Russian customers regarded my goods with reverence, and me with jealousy. The craving for cool consumer goods was perhaps as much a factor in the toppling of the Soviet empire as the yearning for voting rights.

Our economic embargo hurt ordinary Cubans, reducing their living standards, without damaging Cuban elites. The embargo kept alive the flames of leftism in Latin America, creating a rallying cry for anti-imperialists.

The United States, over the years, considered bizarre assassination plots against Fidel Castro, like an exploding seashell. There were also proposals to humiliate him by drugging him with a hallucinogen, or using a depilatory to make his beard fall out. Our tax dollars at work.

Senator Robert Menendez, a Cuban-American Democrat, objects that “President Obama’s actions have vindicated the brutal behavior of the Cuban government.”

Likewise, Senator Marco Rubio, a Cuban-American Republican, denounces the approach as “based on an illusion, on a lie, the lie and the illusion that more commerce and access to money and goods will translate to political freedom for the Cuban people.”

The critics are absolutely right that the Cuban regime is both oppressive and economically incompetent. But wishing unpleasant governments away doesn’t have a great track record.

My views are shaped by having lived in China for a time in the 1980s when the country was opening up to the West. Waves of foreign visitors were deeply unsettling to Chinese who believed in the system.

In 1983, a British friend of mine returned to his hotel to find his contact lenses missing from their case. He asked the hotel staff, and one cleaner explained proudly that he had washed out the contact lens case in the sink.

An uproar followed. Soon all the Chinese staff in that hotel learned, with wild surmise, that Westerners had access to tiny, invisible glasses that they could put on and take off. They absorbed this with astonishment and envy.

Senator Rubio is right that encounters with new technology and wealth are not immediately lethal to authoritarianism. After all, the Chinese Communist Party is still solidly in place, and even imprisoning the great Nobel Peace Prize winner Liu Xiaobo.

Yet these encounters are if not lethal, at least corrosive. China has become less monolithic because of its interactions with the world. There’s no political pluralism in China, but there is economic and cultural pluralism. Maoist days are forever gone.

Likewise, I’m struck how often North Korean defectors have told me that they had a change of heart simply by visiting China or Russia and seeing themselves patronized as backward.

During the North Korean famine in the 1990s, the government there tried to console the starving population with television programs about the dangers of overeating, including a documentary about a man who ate too much rice and exploded. At the time, North Koreans would stare at the rare visiting foreigner, especially anyone a bit rotund, with a transparent range of emotions: jealousy, awe, and perhaps a bit of wariness in case of detonation.

So bravo for the new Cuba policy. Sending in gunmen to liberate the Bay of Pigs failed. Maybe we’ll do better with swarms of diplomats, tourists and investors. Preferably plump.

Krugman’s blog, 12/16/14

December 17, 2014

There were two posts yesterday.  The first was “The Ruble and the Textbooks:”

OK, this is a bit funny: This morning Tim Duy addresses the woes of the ruble, which is in free fall despite a big rate hike, and declares that it “appears really quite textbook”. Meanwhile Matthew Yglesias says that what Russia is doing is “the textbook approach to handling a currency crisis”, and speculates about why it isn’t working.

I’m with Duy here; not sure if it’s actually in any textbook, but as I explained yesterday, for aficionados of emerging-market currency crises this is all quite familiar. (Side note: I invented currency crises — not the thing itself, obviously, but the modern literature — in 1979. Really. And business has been good ever since.) When you have big balance-sheet problems involving foreign-currency debt, an interest-rate hike that tries to discourage capital flight damages the economy, and hence those same balance sheets, from another direction, and it’s common, even standard, for the effort to fail. Most notably, tight-money policies were really really unsuccessful during the Asian financial crisis of 1997-8, on which you can read my take here.

Consider the chart, which shows the policy interest rate in Indonesia: during the 1998 crisis this rate was hiked to 70 percent, yet this wasn’t sufficient to stop a plunge in the rupiah to a fifth of its former value. And Indonesia wasn’t invading any of its neighbors, although it did have a failing authoritarian regime.

So Russia isn’t that unusual a story, except for the nukes.

Yesterday’s second post was “The Limits of Purely Monetary Policies:”

Last night I had an austere repast — OK, steak and a lot of red wine — with some civilized financial-industry economists (they do exist), and heard what is apparently the joke du jour: “Money isn’t everything — good health is 2 percent.”

Well, the money supply isn’t everything, either.

Ambrose Evans-Pritchard pushes back against my in-passing criticism of a column I mainly agree with, in which I argued that it’s hard to see why anyone believes that money supply increases will do the trick after the past six years. I understand where Evans-Pritchard is coming from, because I’ve been there. Indeed, it’s where I started. But I had my road-to-Damascus moment — or more accurately road-to-Tokyo moment — back in 1998. And maybe describing my own conversion to monetary pessimism may help clarify what’s happening now.

So, back in 1998 I was looking at Japan’s troubles, and — like Evans-Pritchard and many others now — believed that the Bank of Japan could surely end deflation if it really tried. IS-LM said not, but I was sure that if you really worked it through carefully you could show that, say, doubling the monetary base will always raise prices, even if you’re at the zero lower bound. So I set out to show the point with a minimalist New Keynesian model; link to the little paper I wrote here. (By the way, I screwed up the aside on fiscal policy. In that model, the multiplier is one.)

To my own surprise, what the model actually said was that when you’re at the zero lower bound, the size of the current money supply does not matter at all. You might think that it’s a fundamental insight that doubling the money supply will eventually double the price level, but what the models actually say is that doubling the current money supply and all future money supplies will double prices. If the short-term interest rate is currently zero, changing the current money supply without changing future supplies — and hence raising expected inflation — matters not at all.

And as a result, monetary traction is far from obvious. Central banks can change the monetary base now, but can they commit not to undo the expansion in the future, when inflation rises? Not obviously — and certainly “credibly promising to be irresponsible”, to not undo expansion in the face of future inflation, is a much harder thing to achieve than simply acting when the economy is depressed.

But, asks Evans-Pritchard, what if the central bank simply gives households money? Well, that is, as he notes, really fiscal policy — it’s a massive transfer program rather than a conventional monetary operation. (And Ricardian equivalence, for what it’s worth, says that it would have no effect even if you could do it — households would know that future taxes will have to rise to pay for today’s gift, and save all of it.) You may say that you don’t care what it’s called. But the distinction isn’t just one of academic classification: Central banks aren’t in the business of just giving money away; what they do is always some kind of asset swap, in which they buy assets or make loans which then become assets. I’m pretty sure that neither the Fed nor the Bank of England has the legal right to just give money away as opposed to lending it out; if I’m wrong about this, put me down for $10 million, OK?

Still, isn’t this just theory? Well, no. Huge increases in the monetary base in previous liquidity trap episodes had no visible effect. And now we have the post-2008 experience, and it’s certainly not an example of central banks easily dealing with economic downdrafts.

Just to be clear, I have supported QE in both Britain and the US, on the grounds that (a) central bank purchases of longer-term and riskier assets may help and can’t hurt, and (b) given political paralysis in the US and the dominance of bad macroeconomic thinking in the UK, it’s all we’ve got. But the view I used to hold before 1998 — that central banks can always cause inflation if they really want to — just doesn’t hold up, theoretically or empirically.

Friedman and Bruni

December 17, 2014

In “This Israeli Election Matters” The Moustache of Wisdom tells us a nation struggles with its identity.  Mr. Bruni, in “Confronting an Ugly Killer,” says Alzheimer’s is deadly, costly and finally getting the blunt discussion it needs.  Here’s The Moustache of Wisdom:

Prime Minister Bibi Netanyahu has set new elections in Israel for March 17. Israel has had critical elections before, but this could be its most important, because the Israeli right today is no longer dominated by security hawks and free-marketeers like Netanyahu. It is dominated by West Bank settlers and scary religious-nationalist zealots like Naftali Bennett, who, if they run the next government and effectively annex the West Bank, will lead Israel into a dark corner, increasingly alienated from Europe, America and the next generation of American Jews.

At the same time, the neighborhood Israel lives in has never been so full of threats. If the Israeli center-left and center-right want to avoid the South African future that the Israeli far right is offering them, then they have to create a coalition that can persuade the Israeli silent majority that they understand, and can blunt, those threats — and allow Israel to securely withdraw from most of the West Bank, either in a negotiated deal with the Palestinians or unilaterally.

“The importance of the 2015 election cannot be too highly emphasized,” Ari Shavit, the Haaretz columnist wrote last week. “This time the question isn’t about the price of an apartment or cottage (cheese), but whether there will be a home for us at all. This time the struggle isn’t about convenience but about the core of our existence. Because this time the forces threatening Israeli democracy and the Zionist enterprise from within are unprecedented in their power.”

So how might the Israeli center contest this foundational election? The best approach I’ve heard comes from Amos Yadlin, Israel’s former chief of defense intelligence, and the pilot who dropped the bomb through the roof of Saddam Hussein’s nuclear reactor. Yadlin, who now directs Israel’s Institute for National Security Studies, argued to me that Israel’s center needs to run on the core values of its founding prime minister, David Ben-Gurion. That is an Israel, he said, “that understands the limits of power of a small country,” and is focused solely on building “a state that has a Jewish majority, a state that is democratic where all citizens are equal, a state that is secure even in a threatening environment and a state whose higher moral caliber is as valued as it was in the past.” And that means a state with a clear, secure border with its Palestinian neighbors.

Yadlin is a tough-minded analyst. He worries that the Israeli right is completely out of touch with the nation’s standing in the world and the left with the dangers in the neighborhood. While he knows that all his Ben-Gurion goals may not be achievable (and Israel may not have a Palestinian partner), he wants the next Israeli government to get caught trying — and trying again — to achieve them. What distinguishes him from Netanyahu and the Israeli right is that Yadlin is not looking for excuses to say that Israel has no negotiating partner, the way Netanyahu did out of fear that genuine negotiations about borders would blow up his right-wing ruling coalition, or the way the Jewish settlers do, because they know genuine negotiations would blow up their messianic vision for forever controlling the West Bank.

Yadlin says he wants the next Israeli government to take “all of Israel’s innovative spirit and brains” and apply them to “out-of-the-box thinking” to find a secure way forward. He sketched three paths for me based on the Israeli-designed traffic management application Waze.com. “As with Waze, if one route is blocked, one recalibrates and chooses a different route to the same destination,” said Yadlin. “We propose: the bilateral negotiations route; the Arab Peace Initiative route; and the independent route.”

The preferred route, argues Yadlin, “is that of bilateral negotiations with the Palestinians to reach a permanent agreement. If this track is impossible, as was proven in 2013-14, then it is time to move to the second route, that of a revised Arab Peace Initiative.” Try to leverage the willingness of Arab states to normalize relations with Israel if it reaches a deal with the Palestinians. The more the Arab states put on the table, the more Palestinians can, in effect, offer Israel and the more cover Palestinians will have for concessions they will have to make. “If this route, too, proves to be blocked,” he said, “we must move to an independent track that will ensure that the viable two-state solution is kept. Israel will deploy along borders that guarantee a Jewish majority and a secure state.”

Netanyahu will still be a formidable candidate, but, interestingly, his popularity plummeted when he called for new elections. I know why: Israelis, though dubious about Palestinian intentions and terrified of their region, are tired of a leader who keeps telling them: there is no exit, everyone hates us and the future will be full of yesterdays. In a country whose national anthem is “Hatikvah” — “The Hope” — the prime minister came to symbolize the opposite to many Israelis, who still want someone with the attributes of Ben-Gurion to test and retest whether hope is possible. The Israeli candidate or party that understands that will have a great chance of winning.

Now here’s Mr. Bruni:

My maternal grandmother lives in my memory as two distinct images. Two distinct people, really.

The first: She’s coming off a plane, and she’s in a pillbox hat, a tailored suit and white gloves. That was how she dressed to fly, back in the days when people actually dressed to fly. We’d meet her at the airport, then drive home in a car suffused with Jungle Gardenia, which wasn’t just her scent. It was her armor and ecosystem, the way she told the world and reassured herself that she was a proper lady.

The second image: She’s on the couch in our TV room. Her blouse has come undone. So have her slacks, which are wrinkled and smudged. She’s spilling out of everything and she’s oblivious, a dazed, haunted look in her eyes. If she’s wearing any Jungle Gardenia, I no longer smell it.

These images are separated not just by years but by illness. My grandmother, Kathryn Owen Frier, developed Alzheimer’s. It turned a fastidious woman with a fiendish talent for crosswords into a slovenly one who couldn’t figure out a stoplight. I remember how mortified I felt for her, how quickly I turned my eyes away. And I remember how awful I felt for having that reaction.

She died more than a quarter century ago. For a long time afterward, I rejected any impulse to write about the way she went, worried that I’d somehow be dishonoring her.

But the world is different now. Much of the unwarranted shame surrounding Alzheimer’s has lifted. People are examining it with a new candor and empathy.

If most Oscar handicappers are correct, the next Best Actress statuette will go to Julianne Moore for her heartbreaking work as a university professor battling early-onset Alzheimer’s in “Still Alice,” to be released nationally next month. And while Moore isn’t the first star to shed a light on the disease — Judi Dench in “Iris” and Julie Christie in “Away From Her” also did so — her performance comes amid other intimate portraits of the toll that Alzheimer’s takes.

A new documentary, “Glen Campbell: I’ll Be Me,” chronicles its recent impact on the singer who made “Rhinestone Cowboy” a megahit in the 1970s.

And one of the most acclaimed novels of 2014 is “We Are Not Ourselves,” by Matthew Thomas, which hinges on an agonizing case of Alzheimer’s. The book became an instant best seller.

“As baby boomers approach their 70s and Alzheimer’s disease becomes increasingly commonplace, more and more fiction writers are attempting to reach into that obscure space,” noted Stefan Merrill Block in The New Yorker last August.

Block himself reached into it for his first novel, “The Story of Forgetting,” in 2008. The novel “Still Alice,” on which the movie is based, was published around that time and went on to sell more than a million copies.

Its author, Lisa Genova, told me that its success underscores not only how many families have been touched by Alzheimer’s but how many had been trapped in silence. “Any disease of the brain has a stigma,” she said. “It’s not like the heart or the kidney. This is something that’s wrong with you.”

After “Still Alice” came out, she was struck by all the real-life stories that people suddenly shared with her. Thomas had the same experience when he promoted “We Are Not Ourselves.”

“I was surprised by how willing people were to be vulnerable,” he told me. Alzheimer’s was something that they desperately needed to talk about.

According to the Alzheimer’s Association, an advocacy group, the estimated number of Americans with the disease will rise from more than five million now to as many as 16 million in 2050, and the cost of caring for them and older Americans with other forms of dementia could reach $1.2 trillion annually.

Angela Geiger, the association’s chief strategy officer, calls Alzheimer’s “the unaddressed public health crisis of this decade.” And she told me that while there have been significant increases in federal funding for research, current spending doesn’t adequately reflect the disease’s status as the sixth leading cause of death in this country, one for which there’s “no treatment that slows the progression.”

It’s a hellish riddle, eroding the identities of those it afflicts and depriving us all of our cherished illusions of control. “Alzheimer’s disease is the opposite of modern life,” wrote Thomas, whose father had it, in Time magazine. “It’s the ascendancy of entropy and chaos.”

It’s not perfumed. It’s not gloved. But it’s what happens to many people and will happen to too many more, especially if we don’t stare unblinkingly at it.

“If we’re shy about it, then we don’t have a sense of urgency,” Genova said. We’re conquering the shyness. With the urgency, we have a ways to go.

Krugman’s blog, 12/15/14

December 16, 2014

There was one post yesterday, “Putin on the Fritz:”

It’s impressive just how quickly and convincingly the wheels have been coming off the Russian economy. Obviously the plunge in oil prices is the big driver, but the ruble has actually fallen more than Brent — oil is down 40 percent since the start of the year, but the ruble is down by half.

What’s going on? Well, it turns out that Putin managed to get himself into a confrontation with the West over Ukraine just as the bottom dropped out of his country’s main export, so that a financing shock was added to the terms of trade shock. But it’s also true that drastic effects of terms of trade shocks are a fairly common phenomenon in developing countries where the private sector has substantial foreign-currency debt: the initial effect of a drop in export prices is a fall in the currency, this creates balance sheet problems for private debtors whose debts suddenly grow in domestic value, this further weakens the economy and undermines confidence, and so on.

The central bank may (or may not, as seems to be true in Russia right now) be able to limit the currency plunge by raising interest rates (now above 13 percent on Russian 10-years), but only at the cost of deepening the recession. Eichengreen et al (pdf), in a good discussion of all this in the Latin American context, give the example of Chile, which was hit very hard by falling copper prices at the end of the 1990s despite a much more favorable institutional setup than Russia right now — and, of course, without having de facto invaded a neighboring country.

I have no idea what this implies for either Russian politics or geopolitics. But talk of a new cold war, comparisons between Putin’s Russia and the USSR, look a bit silly now, don’t they?

Brooks and Nocera

December 16, 2014

In “Warren Can Win” Bobo gurgles that Elizabeth Warren’s aggressive ethos speaks to the disillusionment of the Democratic left wing, and that she may yet be their nominee.  In “When Football Gets the Ax” Mr. Nocera says that at the University of Alabama-Birmingham, it became too expensive to keep up with the big boys.  Here’s Bobo:

Elizabeth Warren’s memoir begins with the story of a family in collapse. She was 12 years old when her father had a heart attack.

His recovery was slow. Unable to work, the family’s finances tanked. The Studebaker was repossessed. When he was able to return to work, Montgomery Ward took away his job selling carpeting and gave him a job selling lawn mowers on commission. Warren asked her mother why the old job was gone. “In her view, his company had robbed him of something he’d worked for. And now, she said, ‘They think he’s going to die.’ ”

The financial spiral had the predictable effect on the family’s emotional life. “Sometimes that spring I would overhear my parents arguing,” Warren remembers, “I guess I shouldn’t describe it as arguing; my father never said much of anything, while my mother yelled louder. They drank more, a lot more. . . . I knew that my mother blamed my daddy for not doing ‘what a man is supposed to do’ and taking care of us.”

Her mother ended up getting a job at Sears, her father got a job as a maintenance man and the family finances stabilized — at a low level. Warren concluded the episode this way: “My mother never had it easy. She fought for everything she and my daddy ever had.”

The memoir is called “A Fighting Chance.” The words “fight” or “fighting” appear in the book 224 times. In high school, Warren writes, she couldn’t play a musical instrument or a sport, “but I did have one talent. I could fight — not with my fists, but with my words. I was the anchor on the debate team.” Of her tennis game she writes, “Once I had a weapon in my hand, I gave it everything I had.”

With relish, she describes a fight she later had with a judge on a panel discussion over bankruptcy law. “The judge probably had a hundred pounds on me, and he started shifting himself closer to the microphone and edging me out of his way. I grabbed the table for leverage and pushed my way to the microphone, going shoulder to shoulder with the judge as I hit back with arguments. . . . I glanced over and noticed with satisfaction that the veins in his neck were throbbing and his face was red and sweating. I wondered briefly whether he might have a stroke right there on the small stage.”

Her biggest adult fight has been against the banks, against what she saw as their rapacious exploitation of the poor and vulnerable. The crucial distinction Warren makes is this one: It’s not just social conditions like globalization and technological change that threaten the middle class. It’s an active conspiracy by the rich and powerful. The game is rigged. The proper response is not just policy-making; it’s indignation and combat.

The political class has been wondering if Warren, a United States senator from Massachusetts, will take on Hillary Clinton for the Democratic presidential nomination. This speculation is usually based on the premise that Warren couldn’t actually win, but that she could move the party in her direction. But, today, even for those of us who disagree with Warren fundamentally, it seems clear that she does have a significant and growing chance of being nominated.

Her chances are rising because of that word “fight.” The emotional register of the Democratic Party is growing more combative. There’s an underlying and sometimes vituperative sense of frustration toward President Obama, and especially his supposed inability to go to the mat.

Events like the Brown case in Ferguson and the Garner case in New York have raised indignation levels across the progressive spectrum. Judging by recent polls, the midterm defeat has not scared Democrats into supporting the safe option; it’s made them angrier about the whole system. As the party slips more into opposition status, with the next Congress, this aggressive outsider spirit will only grow.

In this era of bad feelings, parties are organized more around what they oppose rather than what they are for. Republicans are against government. Democrats are coalescing around opposition to Wall Street and corporate power. In 2001, 51 percent of Democrats were dissatisfied with the rise of corporate power, according to Gallup surveys. By 2011, 79 percent of Democrats were. According to an NBC News/Wall Street Journal poll last month, 58 percent of Democrats said they believed that the economic and political systems were stacked against them.

Clinton is obviously tough, but she just can’t speak with a clear voice against Wall Street and Washington insiders. Warren’s wing shows increasing passion and strength, both in opposing certain Obama nominees and in last week’s budget fight.

The history of populist candidates is that they never actually get the nomination. The establishment wins. That’s still likely. But there is something in the air. The fundamental truth is that every structural and historical advantage favors Clinton, but every day more Democrats embrace the emotion and view defined by Warren.

Now here’s Mr. Nocera:

The most unpopular man in Birmingham, Ala., these days is Dr. Ray Watts, the president of the University of Alabama-Birmingham. Earlier this month, Watts announced that the school was going to eliminate its football team. You can just imagine what happened next.

When Watts told the team that this would be their last season, one player, Tristan Henderson, angrily challenged him in a video that quickly went viral. Later, several hundred supporters chanted and cheered for the coach, and heckled and chased Watts and his police escort, according to Jon Solomon of CBSSports.com.

Mark Emmert, the president of the N.C.A.A., described Watts’s decision as “unfortunate.” A group of important donors wrote a letter to the chancellor of the Alabama university system, calling for an investigation into Watts’s decision. Another big supporter, a Birmingham restaurateur, canceled his $45,000 sponsorship of a television network that aired U.A.B. games and ended the use of his restaurant as the locale for the basketball coach’s weekly radio show. “This is so tragic,” he told a reporter. “It’s like a death.”

Watts, it turns out, is a Birmingham native who played football in high school and who attended the university. He gets how important football is in Alabama. But in pulling together a five-year strategic plan for the school, he came to the obvious conclusion that it simply made no sense to continue fielding a football team. (The school is also eliminating its bowling and rifle teams.)

“Our athletic budget is $30 million,” he told me when we spoke. Of that amount, $20 million comes directly from the school — either through student fees or direct subsidies from the overall university budget. A consultant Watts hired concluded that it would cost an additional $49 million over the next five years to keep the football team competitive with the other schools in Conference USA.

“We could not justify subsidizing football if it meant taking away from other priorities,” he said. Then he added, “This is driven significantly by the changing landscape of intercollegiate athletics.”

Ah, yes, the changing landscape. Let me explain. For the last year or more, the big boys in college athletics — the 64 schools that make up the top five conferences, plus Notre Dame — have been agitating for more freedom to make their own rules. They want, for instance, to be able to give their athletes a stipend that goes beyond a scholarship and more fully reflects the “full cost of attendance.” And through their conference commissioners, the power schools issued a series of veiled threats that if they didn’t get more autonomy, they just might bolt from the N.C.A.A.

Not surprisingly, they got their autonomy. The additional benefits will probably cost each of these schools several million additional dollars per year. But universities like Michigan and Auburn and Notre Dame can afford it. It’s the U.A.B.’s of the world — the so-called mid-majors — that have to decide whether to match the benefits the big schools are giving to athletes or go in another direction.

I have no problem with the power schools giving athletes more benefits; indeed, I’m in favor of it. But what I always thought would happen when this day came — when the financial difference between the power schools and everybody else became overwhelming — is that the smaller schools in Division 1 would be forced to rethink their priorities, just as U.A.B. has. Maybe not get out of football altogether, but de-emphasize it so that the tail finally stops wagging the dog.

But so far, at least, that is not turning out to be the case. At a college sports conference last week in New York, nobody gave U.A.B. any credit for pulling out of football. On the contrary: most of the athletic directors in the room were adamant that they would pay whatever they had to pay to keep pace with the big boys.

“Our board is totally committed to athletics and competing at the highest level,” said Chris May, the athletic director at Saint Louis University. “We are going to be very aggressive.”

“There is no pressure to drop football,” said Mike O’Brien of the University of Toledo. “It is too important to our university.”

When you ask people why it is so important, you get similar responses: a good football team means more applications; it helps generate donations; it is something the community can rally around. “In many ways, football is our front porch,” said Nagi Naganathan, the interim president of the University of Toledo.

Yet schools that have dropped football have lived to tell the tale. In 1995, the University of the Pacific dropped football — the last major school to do so before U.A.B. “Since then, their enrollment has actually gone up,” emailed David Ridpath, an associate professor of sports management at Ohio University.

“Football,” he added, “doesn’t define a university.”

Unfortunately, for too many schools, it does.

Bread and circuses…

Blow and Krugman

December 15, 2014

In “America, Who Are We?” Mr. Blow says we can shout and protest, but we must vote, too.  Prof. Krugman considers “Wall Street’s Revenge” and explains how the Masters of the Universe got politicians to bring back moral hazard.  Here’s Mr. Blow:

Last week I spoke at a seminary and graduate school in New York about the protests following the grand jury decisions in the Michael Brown and Eric Garner cases.

It was invigorating and inspiring to be among so many young people with so much passion about social justice, young people beginning to feel their power as change agents and brimming to exercise it by disrupting the status quo.

However, I couldn’t help noticing a disturbing sentiment echoed in a few of the questions about the value of voting. One gentleman even said something to this effect: “It doesn’t make a difference whom you put in office because the office is corrupt.”

I couldn’t disagree more. Voting is not some fruitless, patrician artifact from a bygone era. It is not for those devoid of consciousness and deprived of truth. It is an incredibly important part of civic engagement. No politicians are perfect, but neither are they all the same. The sameness argument is an instrument of deceit employed by the puppet masters to drive down the electoral participation of young idealists.

We don’t vote for people because they are the exact embodiment of our values, but because they are likely to be the most responsive to them.

Also, there has been too much blood spilled, too many bodies buried in the struggle to expand the franchise of voting in America for us to cavalierly shrug it off. And the effort to constrict the pool of eligible voters is too well organized and too well financed for anyone to see his or her vote as lacking value.

And yet, I do understand the bulging frustration that the political system can foster.

I understand the feelings of these young protesters who are chafing at our current representative democracy and yearning for — yelling for — more direct democracy in which “the people” make direct demands and direct decisions, possibly circumventing an admittedly polarized-to-the-point-of-paralysis federal legislative system.

Protests are a form of direct democracy.

But direct democracy works best at the local level, like town hall meetings. It is far more challenging and unwieldy when national policy changes are sought.

I understand the fundamental questions being raised in these protests and others. There is an emotional declaration: The system is broken. There is also a moral, philosophical question: Who are we?

Are we — or better yet, should we be — a nation that tortures detainees, or targets and kills American citizens with drones, or has broad discretion to spy on the American public? Should we be a country hamstrung over how to deal with millions of undocumented immigrants, or our gun violence epidemic, or our growing income inequality? Should we be a country that accepts bias in its criminal justice system, a country of mass incarceration and a country where so many young black men can be killed by the police?

Who are we?

That is a very real question. Who are we now and who do we aspire to be? Do we aspire to the ideas enshrined in our founding documents? Do we truly believe the Declaration of Independence?

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”

If so, then we must do as the Dr. Rev. Martin Luther King Jr. exhorted this nation to do in his Mountaintop speech: “Be true to what you said on paper.”

King continued: “somewhere I read of the freedom of assembly. Somewhere I read of the freedom of speech. Somewhere I read of the freedom of press. Somewhere I read that the greatness of America is the right to protest for right.”

He read those things in the First Amendment of the Constitution.

America is still straining, against corporatist, elitist, exclusionary forces, to be true in practice to what is clearly written on paper. Representative democracy is not a perfect form of government. It can be fragile and subject to corruption, the only guard against which is unwavering vigilance. But it is a grand idea, exquisite because of its fragility, and deserving of every effort to make it more perfect.

Who are we? We are America — impossibly strong, illogically optimistic, eternally hopeful. This is a laboratory in which one of the greatest experiments in human history is still underway. We can be whoever we want to be, dare to be, dream of being.

We are the young people in the streets, who shout out and die-in for the right to be treated equally and to live freely. We are people who must know that the voice and the vote are mutual amplifiers, not mutually exclusive.

I wish I could be optimistic about the future of the country, but at this point I’m not.  Here’s Prof. Krugman:

On Wall Street, 2010 was the year of “Obama rage,” in which financial tycoons went ballistic over the president’s suggestion that some bankers helped cause the financial crisis. They were also, of course, angry about the Dodd-Frank financial reform, which placed some limits on their wheeling and dealing.

The Masters of the Universe, it turns out, are a bunch of whiners. But they’re whiners with war chests, and now they’ve bought themselves a Congress.

Before I get to specifics, a word about the changing politics of high finance.

Most interest groups have stable political loyalties. For example, the coal industry always gives the vast bulk of its political contributions to Republicans, while teachers’ unions do the same for Democrats. You might have expected Wall Street to favor the G.O.P., which is always eager to cut taxes on the rich. In fact, however, the securities and investment industry — perhaps affected by New York’s social liberalism, perhaps recognizing the tendency of stocks to do much better when Democrats hold the White House — has historically split its support more or less equally between the two parties.

But that all changed with the onset of Obama rage. Wall Street overwhelmingly backed Mitt Romney in 2012, and invested heavily in Republicans once again this year. And the first payoff to that investment has already been realized. Last week Congress passed a bill to maintain funding for the U.S. government into next year, and included in that bill was a rollback of one provision of the 2010 financial reform.

In itself, this rollback is significant but not a fatal blow to reform. But it’s utterly indefensible. The incoming congressional majority has revealed its agenda — and it’s all about rewarding bad actors.

So, about that provision. One of the goals of financial reform was to stop banks from taking big risks with depositors’ money. Why? Well, bank deposits are insured against loss, and this creates a well-known problem of “moral hazard”: If banks are free to gamble, they can play a game of heads we win, tails the taxpayers lose. That’s what happened after savings-and-loan institutions were deregulated in the 1980s, and promptly ran wild.

Dodd-Frank tried to limit this kind of moral hazard in various ways, including a rule barring insured institutions from dealing in exotic securities, the kind that played such a big role in the financial crisis. And that’s the rule that has just been rolled back.

Now, this isn’t the death of financial reform. In fact, I’d argue that regulating insured banks is something of a sideshow, since the 2008 crisis was brought on mainly by uninsured institutions like Lehman Brothers and A.I.G. The really important parts of reform involve consumer protection and the enhanced ability of regulators both to police the actions of “systemically important” financial institutions (which needn’t be conventional banks) and to take such institutions into receivership at times of crisis.

But what Congress did is still outrageous — and both sides of the ideological divide should agree. After all, even if you believe (in defiance of the lessons of history) that financial institutions can be trusted to police themselves, even if you believe the grotesquely false narrative that bleeding-heart liberals caused the financial crisis by pressuring banks to lend to poor people, especially minority borrowers, you should be against letting Wall Street play games with government-guaranteed funds. What just went down isn’t about free-market economics; it’s pure crony capitalism.

And sure enough, Citigroup literally wrote the deregulation language that was inserted into the funding bill.

Again, in itself last week’s action wasn’t decisive. But it was clearly the first skirmish in a war to roll back much if not all of the financial reform. And if you want to know who stands where in this coming war, follow the money: Wall Street is giving mainly to Republicans for a reason.

It’s true that most of the political headlines these past few days have been about Democratic division, with Senator Elizabeth Warren urging rejection of a funding bill the White House wanted passed. But this was mainly a divide about tactics, with few Democrats actually believing that undoing Dodd-Frank is a good idea.

Meanwhile, it’s hard to find Republicans expressing major reservations about undoing reform. You sometimes hear claims that the Tea Party is as opposed to bailing out bankers as it is to aiding the poor, but there’s no sign that this alleged hostility to Wall Street is having any influence at all on Republican priorities.

So the people who brought the economy to its knees are seeking the chance to do it all over again. And they have powerful allies, who are doing all they can to make Wall Street’s dream come true.

Krugman’s blog, 12/13/14

December 14, 2014

There were two posts yesterday.  The first was “Is Our Economic Commentators Learning?”:

We are now in our seventh year at the zero lower bound. Over that period we’ve seen massive deficits rise and fall, aggressive monetary expansion and ill-advised monetary tightening, extreme fiscal austerity, and more. At this point we should therefore have a pretty good idea of how things work in this environment. And as I’ve often pointed out, everything has been more or less exactly what you would have expected from IS-LM (with the central bank controlling the monetary base, but not the endogenous money supply).

It’s remarkable, then, how much commentary in the media involves assertions that are completely at odds with everything we’ve seen since the financial crisis. I made fun of belief in invisible bond vigilantes and the confidence fairy in mid-2010, and sure enough, there have been no sightings of either in all the years since. Yet you’d never know that from the media commentary.

Simon Wren-Lewis offers a depressing example: he finds Robert Peston of the BBC continuing to talk about interest rates by invoking the invisible bond vigilantes – when as Wren-Lewis notes, France now pays much lower interest rates on its debt than the UK, and as he doesn’t note, so does Japan, with its very large debt and aging population. Worse still, however, Peston describes his fantasies – OK, I guess you could call them “speculations”, but anyway there is no evidence that they are driven by anything outside his own imagination – as the message being conveyed by “Mr. Market.” Through telepathy?

But belief in the invisible bond vigilantes and the confidence fairy isn’t the only faith that seems oddly impervious to evidence. Ambrose Evans-Pritchard, in an otherwise coherent description of Europe’s deflation risk, approvingly quotes Tim Congdon blithely declaring that monetary reflation in a liquidity trap is no problem:

The interest rate is totally irrelevant. What matters is the quantity of money. Large scale money creation is a very powerful weapon and can always create inflation.

Sure. Just look, in the accompanying chart, at the rate of M1 growth in the US versus the Fed’s preferred measure of inflation. Feel the power! Seriously, how can an alleged expert be talking straight monetarism at this point in history?

You have to wonder, where does conventional wisdom about how the economy works come from? Not from economic models, which actually don’t lead to the popular stories about bond vigilantes and confidence fairies, or say that the money supply is decisive when you’re at the zero lower bound. Not from experience, which has been utterly at odds with “mediamacro” for years. Apparently it comes from the gut – or maybe from some other anatomical feature in the same general vicinity. And then these gut feelings are reported as facts.

Yesterday’s second post was “Petrothoughts:”

Just leaving a conference in Dubai, and thinking about oil prices. (A lot of the conference was actually about geopolitics, and I don’t want to think about the quite grim stuff from that end.) So, some not especially organized notes.

One involves the failure of OPEC to restrict production to support prices. I guess I wonder why anyone thought that was likely. My understanding has always been that when people say OPEC, the subtitle reads “Saudi Arabia”, which is the only player that has ever done much to restrict output to sustain prices. And Saudi Arabia only accounts for about 13 percent of world production, which gives it limited power even given inelastic demand (especially because unconventional oil supply is probably quite price-elastic, further reducing Saudi market power.)

Also, consider the precedents: the last time there was anything like the recent oil glut, namely back in the 1980s, even drastic cuts in Saudi production, shown in the accompanying figure, weren’t enough; eventually the Saudis gave up, and prices crashed, so why should they go through that again?

My other thought is that Venezuela-with-nukes (Russia) keeps looking more vulnerable to crisis. Long-term interest rates at almost 13 percent, a plunging currency, and a lot of private-sector institutions with large foreign-currency debts. You might imagine that large foreign exchange reserves would allow the government to bail out those in trouble, but the markets evidently don’t think so. This is starting to look very serious.

And now the joy of trying to sleep on a very long flight.


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